A recent article in the Motley Fool pointed out that “Apple Inc. (NASDAQ:AAPL)’s annual payout is higher than the current market cap of 176 of the S&P’s 500 components.” Well, the icing on the cake of any dividend stock is of course a dividend increase. We ran the CapitalCube screener to see some of the companies that might be justified in increasing dividends and the list surprised even us! In addition to Apple Inc. (NASDAQ:AAPL) companies like Microsoft Corp. (NASDAQ:MSFT) and Monsanto Co. (NYSE:MON) were begging for a closer look.
Could a Dividend Increase by Apple Inc. (NASDAQ:AAPL) be justified?
To check for the likelihood of a dividend increase at Apple Inc. (NASDAQ:AAPL), we look for outperformance relative to its peers (scroll down to the end for the peer list we used) in terms of pre-tax margin and operating cash flow. In addition, we also filter for relatively low leverage and good liquidity, which indicates sufficient support for debt servicing. We also look for a price to book value (P/B) that is positive, relatively low growth expectations (based on P/E) and a share price that has underperformed its peers. Overall, these conditions suggest that there is pressure on management to return money to the shareholders in the form of a dividend in order to increase their total returns. Finally, we overlay the dividend quality (medium or high) and ending cash dividend coverage (moderate or strong) to indicate whether the company is likely to increase its dividend.
Is a Share Buyback justified for Apple Inc.?
|Dividend Increase/Initiate Conditions||AAPL-US||Comparable||Pass/Fail|
|Dividend payout||<=||100% (= 0% for initiate)||27.5||100||Pass|
|Pre-tax margin||>=||1.2 x Peer median*||30.1||20.1||Pass|
|Free cash flow (% revenue)||>=||1.2 x Peer median*||25.5||22.7||Pass|
|Debt to market equity||<=||1.2 x Peer median*||4.7||13.3||Pass|
|% below 52-week high share price||>=||1.2 x Peer median*||34.0||16.0||Pass|
|Price to earnings (P/E)||<=||1.2 x Peer median*||11.6||14.8||Pass|
|Price to book (P/B)||>=||0||3.4||0||Pass|
|Dividend quality||=||Medium or High||High||Medium or High||Pass|
|Ending cash/dividend||>=||3 (Strong) or 1 (Moderate)||Strong||Strong or Moderate||Pass|
|* We use a 20% tolerance (0.8-1.2x) around the median.|
Fundamentals support a dividend increase
Apple Inc. (NASDAQ:AAPL)’s margins and cash flow are good compared to its peers. In addition, the company’s leverage and liquidity ratio suggest the company can easily service its current debt. These factors, along with the company’s relatively low growth expectations and weak share price performance, indicate that the company is in a position to increase its dividend. The high quality dividend and a strong cash cushion (a healthy 4.1x the cash dividend) also seem to support a dividend increase.
Is a Share Buyback justified for Apple?
Peer set for Apple Inc. (NASDAQ:AAPL)
The following peers were used in this analysis: Google Inc. Cl A (NASDAQ:GOOG), Microsoft Corp. (NASDAQ:MSFT), Samsung Electronics Co. Ltd.(KOREA:005930), Intel Corp. (NASDAQ: INTC), EMC Corp. (NYSE:EMC), Hewlett-Packard Co. (NYSE:HPQ), Dell Inc. (NASDAQ:DELL), Nokia Corp. (ADR)(NYSE:NOK).